Many publicly traded companies provide their employees with opportunities to acquire stock in the employer corporation on favorable terms. However, employees often encounter a number a obstacles when they are ready to sell their stock to diversify their portfolios. For example, these obstacles may include (1) exposure to potential liability for trading on inside information, (2) negative market perception about their reasons for selling, and (3) employer stock ownership guidelines, which are used by many companies to encourage employees to hold company stock for the long term.
Recent years have seen the development of a practice that has partially addressed one of these obstacles. Rule 10b5-1 under the Securities Exchange Act of 1934, which became effective on Oct. 23, 2000, now provides that a seller of securities will not be liable for trading on inside information if the sale was initiated under the proper circumstances at a time when the seller did not possess material, nonpublic information about the issuer of the securities. As a result of this new rule, it has become possible for an employee to enter into an agreement with a broker to sell company stock over a period of time without exposure to risk of liability for insider trading. Many of these pre-planned sale programs incorporate the scheduled exercise of an employee stock option through the broker, followed by the immediate sale of the shares acquired upon exercise of the option.
Conventional pre-planned sale programs sponsored by brokers represent an advance over earlier unplanned sales, but suffer from a number of disadvantages. First, each broker typically has its own form documents, which must be reviewed and revised to meet the desires of the employee and the requirements of the issuer and its counsel. This is often a time-consuming and inefficient process. Second, most brokers charge premium fees for the additional services required to implement these plans. These fees are typically born by employees and reduce the benefits they receive from participating in stock ownership programs. Third, the need for the involvement of a pre-selected broker with these conventional plans limits the choice of brokers for the duration of the agreement, which can extend over a period of years. This lack of flexibility is a deterrent to the use of these plans. In addition, the role of the employer in selecting a broker to execute the exercise of stock options as part of such a plan could be considered to constitute prohibited “arranging” for an extension of credit under Section 13(k) of the Securities Exchange Act.